Adjustable Rate Mortgage

A mortgage rate is the interest you pay on your home loan. These rates can change daily due to market conditions. An Adjustable Rate Mortgage (ARM) has a rate that may change based on your loan agreement. For example, a 5/1 ARM means your rate stays the same for five years and then adjusts annually.

Many people choose ARMs because the initial rate and payments are usually lower than fixed-rate mortgages, offering early savings. After the fixed period, any changes in your rate are limited to a certain cap.

An Adjustable Rate Mortgage (ARM) is similar to other home loans but is particularly suited for those who may not plan to stay in their home long-term. Here’s how it works:

1. Set Your Goals: Determine what you want from homeownership and what you can afford.
2. Choose Your Mortgage: If you're likely to move soon, an ARM might be a good choice because it typically offers lower initial rates.
3. Agree on Terms: You and your lender will decide on the loan details, such as your monthly payment, interest rate, and other key factors. These terms are influenced by your credit score, debt-to-income ratio (DTI), monthly income, and the housing market conditions.
4. Understand DTI: Your DTI is calculated by dividing your total monthly debt payments by your monthly income. A lower DTI and a higher credit score can help you secure better loan rates.
5. Expect Changes: With an ARM, your initial payments will be different from those at the end of the loan term because the interest rate adjusts over time. This means your payments could go up or down based on interest rate changes.

Remember, the flexibility of an ARM comes with fluctuating payments, so it’s important to be prepared for potential changes in your monthly expenses.

Upfront Savings: Enjoy lower initial payments compared to fixed-rate loans, giving you extra cash to achieve your financial goals.

Initial Fixed Period: Benefit from a lower fixed rate at the start of your mortgage.

Interest Caps: No surprises with rate increases. ARMs have caps that limit how much the interest rate can rise, both annually and over the loan's lifetime.

ARMs can be ideal for:

• Frequent movers
• Workers expecting a rise in income
• House flippers
• Those planning to refinance soon
• Growing families looking to move to a bigger home soon

When applying for a mortgage, each lender has their own set of criteria. It's important to check with your lender for their specific approval requirements.

Here are some common qualifications for an Adjustable Rate Mortgage (ARM):

• Credit Score: Typically, you'll need a minimum score between 580 and 620. For the best rates, aim for a score between 670 and 739. Some lenders might accept scores as low as 500 for certain ARMs like FHA loans.

• Debt-to-Income Ratio (DTI): Try to keep your DTI below 50%. A DTI over 43% may make it harder to secure a mortgage.

• Down Payment: Be prepared to make at least a 3% down payment, though this can vary based on the type of loan and its specific terms.

If you're considering refinancing your mortgage with an ARM, you'll need to meet the above criteria plus:

• Proof of Income: Provide documents like W2s, tax statements, or pay stubs to show consistent income.

• Asset Information: Include statements from bank accounts, 401k plans, and other investments to demonstrate additional financial resources.

• Homeowners Insurance: Ensure you have adequate coverage for your property.

Adjustable-Rate Mortgages (ARMs) come with initial fixed-rate periods followed by adjustable rates. Here’s a quick breakdown:

• 5/1 & 5/6 ARM: Fixed rate for five years, then adjusts annually or every six months.
• 7/1 & 7/6 ARM: Fixed rate for seven years, then adjusts annually or every six months.
• 10/1 & 10/6 ARM: Fixed rate for ten years, then adjusts annually or every six months.

Types of Loans:

• Conventional ARM: Not government-insured, offering flexibility with terms and conditions. Down payments can be as low as 3%, but private mortgage insurance (PMI) may be required with less than 20% down until 20% equity is reached.
• FHA ARM: Insured by the Federal Housing Administration, suitable for first-time buyers or those with lower credit scores. Requires a down payment as low as 3.5% and includes both upfront and ongoing mortgage insurance payments.
• VA ARM: Guaranteed by the Department of Veterans Affairs, available to military personnel, veterans, and certain military spouses. Offers benefits like no down payment and no monthly mortgage insurance premiums.

For personalized advice and to explore which loan option fits your needs, contact a loan officer at New American Funding.

Considering switching from an ARM to a Fixed-Rate mortgage? This means getting a new mortgage with different terms. You'll need to follow the same steps as your original mortgage application, including providing proof of income, debt-to-income ratio details, and identification. Remember, there will be closing costs and fees for the new loan.

Deciding to switch depends on market conditions and your personal needs. Always consult with your lender to understand their specific refinancing requirements.

Use our online mortgage calculator to estimate your payments. Concerned about rising rates? Explore our 5-Year Rate Protection Pledge.

Do Adjustable-Rate Mortgages Have Prepayment Penalties?

Some adjustable-rate mortgages might include prepayment penalties, but it's not a given. Always check with your lender about your specific loan terms.

What's a Benefit of an Adjustable-Rate Mortgage?

A key benefit of adjustable-rate mortgages (ARMs) is their initially lower rates, which can save you money early on. This saving can be used for other financial priorities, like investing or paying down your principal faster to build home equity.

Can I Switch My ARM to a Fixed-Rate Mortgage?

Yes, you can refinance your ARM to a fixed-rate mortgage. This is often beneficial if done before your ARM's interest rate adjusts.

What are the Loan Limits for ARMs?

For 2024, the loan limit for an ARM is up to $766,550 for a single-family home, with potentially higher limits in pricier areas.

Do ARMs Have Rate Caps?

Yes, ARMs often come with rate caps that prevent the interest rate from exceeding a certain level. These caps can apply to the initial adjustment, subsequent adjustments, or over the entire loan term.